Competing Online II: Recent Interpretations

The second in a two-part series looking at how the Anti-Unfair Competition Law applies to the digital world.

By Chen Jing and Yang Ting

The Internet era is one for innovations not only related to products, technologies and services but also business models. In China nowadays, Internet tycoons engage in increasingly intense competition across many fields addressed by endlessly emerging measures. As the saying goes: Each technical innovation of Google is accompanied by corresponding lawsuits. According to the authors’ personal experience, a party in a case involving unfair competition aims not only at the limited “compensation for loss” and attack the other party’s business reputation, but also at establishing its advantageous position in the relevant field by restricting the other party’s business operations through the lawsuit. Thus, there are an increasing number of business purposes behind a lawsuit involving Internet-related unfair competition, and an excellent lawyer shall not only be an ex post right-defender, but also help his client to realize business goals through the lawsuit.

In this paper, the authors will briefly interpret the judicial application of Article 2 in the newly revised Unfair Competition Law, which came into effect Jan. 1, and the possible influences of revisions to it on judicial practices based on some actual cases involving Internet-related unfair competition, so as to provide some reference points.

I. Application of general provisions in the Unfair Competition Law

Paragraph 1, Article 2 of the current Unfair Competition Law (1993) stipulates: “A business operator shall, in his market transactions, follow the principles of voluntariness, equality, fairness, honesty and credibility and observe generally recognized business ethics;” Paragraph 2, Article 2 stipulates: “‘Unfair competition’ mentioned in this Law refers to a business operator’s acts violating the provisions of this Law, infringing upon the lawful rights and interests of another business operator and disturbing the socio-economic order.” The so-called “general provisions in the Unfair Competition Law” in the legal sector refer to the above Paragraphs 1 and 2 of Article 2.

According to the authors’ searches and statistics , there were a total of 1,914 first-instance cases on civil disputes involving Internet-related unfair competition in China from 2000 to the end of September 2017. Among them, 903 cases involved the independent or supplementary application of Paragraph 1, Article 2 of the Unfair Competition Law, amounting to 47.18%. We think such a high proportion is closely related to the diverse way in which the article can be applied.

Currently, the judicial application of general provisions in the Unfair Competition Law mainly includes the following three circumstances:
First, they are applied as a supplement to other clauses in the Unfair Competition Law. For example, in the Case of Qihoo 360 Technology Co., Ltd. v. Beijing Baidu Netcom Science and Technology Co., Ltd. on Dispute Involving Unfair Competition, we acted as legal agents of the plaintiff Qihoo 360 Technology, and proposed that the provisions in Article 14 of the Unfair Competition Law on business discrediting as well as the provisions on “voluntariness,” “honesty and credibility” and generally recognized business ethics in Paragraph 1, Article 2 shall be applied. The first-instance court approved our proposal and affirmed that the acts of the defendant Baidu Netcom “apparently went against the principle of honesty and credibility and generally recognized business ethics, caused damage to the company image of Qihoo 360 and the reputation of its products and services, constituted the business discrediting stipulated in Article 14 of the Unfair Competition Law, and violated the provisions in Paragraph 1, Article 2 of the Unfair Competition Law that a business operator shall follow the principles of “voluntariness, equality, fairness, honesty and credibility and observe generally recognized business ethics.”

Second, they are applied as a supplement to special laws on intellectual property such as the Trademark Law. As shown in the following chart, among the aforesaid 903 cases involving Internet-related unfair competition in which Article 2 of the Unfair Competition Law was applied, 85 cases involved the affirmation of exclusive right to use trademark and 80 cases involved the affirmation of copyright. It is evident that in such cases, the infringement on trademark or copyright is deemed as the factual basis for constituting unfair competition. The application of general provisions in the Unfair Competition Law in such a manner has always been criticized by the intellectual property practitioners as it confuses the relationship between special laws on intellectual property and the Unfair Competition Law, goes against the legislative spirit of these special laws, creates an exclusive right beyond these special laws in a disguised form, inappropriately expands the scope of intellectual property protection, leads to the embezzlement of public domains or the impairment of innovations, or weakens the legal adjustment function of special laws.

Third, Article 2 of the Unfair Competition Law is directly and independently applied in a case. In the Retrial Case of Shandong Province Food Import-Export Company, Shandong SANNIS Co., Ltd. & Shandong SANFOD Group Co., Ltd. v. Qingdao SKD Credit Trading Co., Ltd. & Ma Daqing on Unfair Competition (also known as the “Kelp Quota Case”) in which the authors acted as legal agents, the Supreme People’s Court affirmed for the first time the status of Article 2 in the Unfair Competition Law for direct and independent judicial application as a general provision. The three elements for the direct and independent judicial application of the said article include: there are no special provisions in other laws on the act of competition involved in the case; the lawful rights and interests of another business operator are actually damaged by the act of competition; the act of competition is improper or punishable because it actually goes against the principle of honesty and credibility and the generally recognized business ethics. In the above three elements, the first one is the easiest to be confirmed. The focus of the second one lies in determining whether there are lawful rights and interests involved in a specific case and whether such lawful rights and interests are actually damaged. The difficulty of the third one is how to clearly define the principle of honesty and credibility and the generally recognized business ethics in the case.

The retrial ruling of the Kelp Quota Case was made in October 2010, which was published at the beginning of 2011 after the case is listed as a guiding one by the Supreme People’s Court. As the status of Article 2 in the Unfair Competition Law for direct and independent judicial application has been officially affirmed by the case, the amount of cases in which the said article is directly applied has substantially increased ever since in various courts of China, including those on disputes involving Internet-related unfair competition. According to the relevant statistics , the number of cases of disputes involving Internet-related unfair competition in which Article 2 of the Unfair Competition Law is applied has maintained a steady increase since 2011, increased rapidly during 2013-2015, and reached the peak between the end of 2014 and the beginning of 2015.

As we said before, the key elements for the application of Article 2 in the Unfair Competition Law are the second and the third ones, which are embodied in specific cases as affirming the “lawful rights and interests” and their “damage” as well as affirming the “principle of honesty and credibility and the generally recognized business ethics” and their “violation.” In the “Baidu Tag-adding Case” in which the authors acted as legal agents, Beijing Higher People’s Court followed the adjudication thinking of affirming “business models” as “lawful rights and interests” by referring to the lawsuit between Qihoo 360 and Tencent, affirmed Baidu’s research results as its “lawful rights and interests,” and held that Qihoo 360 must testify its act of adding caution tags to dangerous search results of Baidu (the so-called “tag-adding”) is necessary and for public interest or else such act is improper. Such a thinking was later concluded as the “principle of noninterference without necessity for public interest,” which has caused great controversy in the legal profession.

Although the “principle of noninterference without necessity for public interest” was recognized by Qihoo 360 in the retrial case, it deserves discussion in the authors’ opinion. To create interests and rights for a market player through judicial means in a case without the reference to specific legal provisions or industrial practices or rules and to make judgment on such a basis about whether the relative party’s act causes damage to the newly created interests and rights, it is in our opinion highly possible to go beyond the protection scope of current laws and regulations as well as constituting the abuse of Article 2 in the Unfair Competition Law.

Beijing No. 1 Intermediate People’s Court set a good example for defining the “principle of honesty and credibility and generally recognized business ethics” in the “Robots Agreement Case,” another case with great industry implications in which the authors acted as legal agents. In this case, the court gave sufficient consideration to “the current situation of the Internet industry and especially the search engine sector as well as the fact that the Internet industry has a mature self-discipline organization – Internet Society of China (ISC) – with its Public Pledge of Self-Regulation for solving the relevant disputes,” proposed that “in case there is any dispute related to the robots agreement, the search engine service provider and the website service provider or owner shall follow the “negotiation-notification” procedure, supported the claims of Qihoo 360 that conform to such a rule and rejected the claims of Baidu that go against the rule. Such a definition of the “principle of honesty and credibility and generally recognized business ethics” by referring to industrial standards or practices has sufficient basis for argumentation, and is easier to be recognized and accepted by the relevant parties.

II. Amendment to general provisions and adding of a special article for the Internet in the new Unfair Competition Law and their possible influences

As we said before, the trend of expanding the use of, or abusing, general provisions in the current Unfair Competition Law reached a peak in 2015, attracting the extensive attention of the legal profession, and was reflected in the revision suggestions for the Anti-Unfair Competition Law.

In the new Anti-Unfair Competition Law, the original Paragraphs 1 & 2, Article 2 have been adjusted: Paragraphs 1 is revised to read: “A business operator shall, in his production and operation activities, follow the principles of voluntariness, equality, fairness, honesty and credibility and observe the laws and business ethics,” which is more precise than the original version. Paragraphs 2 is revised to read: “Unfair competition” mentioned in this Law refers to a business operator’s acts in his production and operation activities which violate the provisions of this Law, disturb the market competition order, and infringe upon the lawful rights and interests of another business operator or consumers,” which is not only more comprehensive but also clearer about the conditions for confirming whether an act of unfair competition is constituted according to general provisions. In accordance with the newly revised Paragraph 2, the constitutive elements for an act of unfair competition include: (1) the act happens in production and operation activities; (2) the act violates the provisions of this Law, especially the provisions on principles of competition in Paragraph 1, Article 2; (3) the act damages three kinds of interests, i.e. the market competition order (public interest), the lawful rights and interests of another business operator, and the lawful rights and interests of consumers. The second and the third elements may involve complicated interest measurement, and belong to substantial judgment standards .

In combination with the previous discussion on the judicial application of general provisions, the difficulty of the above second element still lies in how to define the “principle of honesty and credibility” and “business ethics” in a specific case. The new law has summarized the recognized “principle of honesty and credibility” and “business ethics” for the Internet industry, and finally formed the “special article for the Internet:”

Article 12 A business operator who uses the Internet for production and operation activities shall abide by the provisions of this Law. The business operator shall not commit any of the following acts which obstruct or destroy the normal operation of network products or services lawfully provided by another business operator with technological means, through influencing the users’ choices or in other manners:
(1) Inserting linkages or realizing response redirection by force in network products or services lawfully provided by another business operator without the latter’s consent;
(2) Misleading, deceiving or forcing users to change, close or unload network products or services lawfully provided by another business operator;
(3) Viciously realizing incompatibility with network products or services lawfully provided by another business operator;
(4) Any other act which obstructs or destroys the normal operation of network products or services lawfully provided by another business operator.

It’s worth noting that in the above “special article for the Internet,” the types of act stipulated in Items (1) and (2) are relatively specific and clear, and the Internet enterprises shall avoid committing these explicitly prohibited acts. As for the act of “vicious incompatibility” in Item (3), the difficulty for adjudication is the confirmation of “viciousness.” According to the authors’ personal experience, if the plaintiff can sufficiently testify the “rationality” and “necessity” of or even the “public interest” in its act and deny the pertinence of such act, the act may be excluded from “vicious” ones. Therefore, an Internet enterprise shall analyze the “rationality” and “necessity” of or even the “public interest” in any act whose legality is uncertain before committing such act, keep the relevant evidence materials when deciding to commit such act, and avoid committing such act on any specific competitor. The provision of “any other act which obstructs or destroys the normal operation of network products or services lawfully provided by another business operator” in Item (4) fails to literally distinguish properness and improperness, and apparently faces the risk of expanded application.

According to the authors’ anticipation, if any other act of competition that “obstructs or destroys the normal operation of network products or services lawfully provided by another business operator” other than those stipulated in the “special article for the Internet” is involved in any future Internet-related case, the court may, by referring to the rich adjudication experiences after 2011 and applying Article 2 of the new Unfair Competition Law, affirm the illegality of such act on the basis of interpreting the “principle of honesty and credibility” and “business ethics” involved in the case.

In the three elements, the third element is a “threshold” one. In the new Unfair Competition Law, the words “disturb the market competition order” is put before the words “infringe upon the lawful rights and interests of another business operator,” and the words “or consumers” are added. Such an adjustment revels that general provisions of the new law involve the measurement and choice of multiple interests, which not only has profound impacts on affirming acts of unfair competition, but also highlights the new law’s nature as an economic law or a public law.

Chen Jing and Yang Ting are Partners and Attorney at the Commerce & Finance Law Offices. Chen specializes in IP and Yang specializes in dispute resolution. They can be reached at: chenjing@tongshang.com, yangting@tongshang.com. The authors contributed articles on behalf of LexisNexis, the legal research and solution provider.

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